pension death benefits facts and planning · pension death benefits taxation •death before 75 and...
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PENSION DEATH BENEFITS FACTS AND PLANNING
12 December 2018
Justin Corliss, Senior Business Development Manager
PENSION DEATH BENEFITS
By the end of this session you will be able to:
• Identify what death benefit choices are available
• Explain the taxation of death benefits
• Understand the impact of IHT on death benefits
• Describe spousal bypass trusts and how they work
LEARNING OBJECTIVES
PENSION DEATH BENEFITS
THE OPTIONS
PENSION DEATH BENEFITS
Scheme rules rule….
Schemes may not allow full flexibility Schemes are not all discretionary
HOW IT WORKS
PENSION DEATH BENEFITS HOW IT WORKS
Original DC Pension
Death of member
Lump sum or annuity
Dependant or
nominee(s)
?
Lump sum or annuity
?
Yes
Yes
Lump sum or annuity
?
Scheme administrator will nominate
No
Yes
Death of nominee
No
Dependants or nominee ‘s FAD
No
PENSION DEATH BENEFITS HOW IT WORKS
Original Pension
Lump sum or annuity
Death of dependant or nominee
Dependants or nominee’s FAD
Death of member
Lump sum or annuity
Successor’s FAD
Death of survivor
Lump sum or annuity
Successor’s FAD
Death of survivor
PENSION DEATH BENEFITS WHO CAN GET WHAT
Beneficiary Options
Dependant Lump sum and/or income
Nominee Lump sum and/or income
No Dependant or
Nominee
Scheme administrator
discretion
Lump sum and/or income
Anyone else but
Dependant exits
Lump sum
Income
PENSION DEATH BENEFITS EXPRESSION OF WISH
24/7 access to online service
Do the scheme rules allow it?
Who do you want to receive benefits?
What do you want to give?
Planning Point: Make sure expression of wish forms
regularly reviewed especially if separation/divorce/remarriage
PENSION DEATH BENEFITS EXPRESSION OF WISH
PENSION DEATH BENEFITS HOW IT WORKS
Original Pension
Scheme Administrator discretion
Death of member
Gather evidence
Direction/Binding nomination
Nominated beneficiaries receive
funds according to rules
Chosen beneficiaries offered death benefits
according to rules
Planning Point: Check how scheme is set up
PENSION DEATH BENEFITS SCHEME RULES RULE
PENSION DEATH BENEFITS
TAXATION
PENSION DEATH BENEFITS TAXATION
• Death before 75 and paid
within 2 years – no income tax but LTA test
after 2 years – income tax at recipient’s marginal rate of tax or special lump sum death benefit charge of 45% for a non-individual but no LTA test
UNCRYSTALLISED PENSION FUND
Member
1st Death
• Death after 75 - income tax at recipient’s marginal rate or
special lump sum death benefit charge of 45% for a non-individual but no LTA test
PENSION DEATH BENEFITS TAXATION
• Death before 75 - no income tax * and no LTA test
CRYSTALLISED PENSION FUND
Member
• Death after 75 - income tax at recipient’s marginal rate or
special lump sum death benefit charge of 45% for a non-individual but no LTA test
* Lump sums from crystallised funds must meet the 2 year rule or they are taxable
PENSION DEATH BENEFITS TAXATION - RESPONSIBILITIES
Scheme Beneficiaries HMRC PRs
Tell PRs LTA used
Issue bill to Beneficiaries
Decide on death
benefits
Notify HMRC of
excess
PENSION DEATH BENEFITS
INHERITANCE TAX
PENSION DEATH BENEFITS TAXATION - IHT
Estate subject to IHT
Pension Pension
Estate subject to IHT
PENSION DEATH BENEFITS TAXATION - IHT
The pension vs discretionary trust
Trust Pension
Putting money in
During
At the end
20% over NRB
Exempt Up to 6%
Normally exempt Total of 40%
Normally exempt
PENSION DEATH BENEFITS
When does IHT apply?
TAXATION - IHT
1
2
3
4
Contributions
Annuity guarantees
Estate entitled to benefit/power of disposal
Transfers
PENSION DEATH BENEFITS
Mark lives in England, is terminally ill and divorced
EXAMPLE - HOW IHT MIGHT WORK ON TRANSFER
He has 2 adult children
He transfers his DB pension to a DC scheme and dies 2 months later
The transfer of value is £1 million
PENSION DEATH BENEFITS
Before figure – this depends on the open market value (high as death was soon after transfer)
HMRC state it to be £980,000
After figure – calculated using an UFPLS
25% of £1m taxed at 0% = £250,000
Income tax of 45% of £750,000 (other taxable income of £150,000) =£337,500
Value of retained rights £1m - £337,500 = £662,500
Before figure – After figure = £980,000 - £662,500 = £317,500
EXAMPLE – HOW IHT MIGHT WORK ON TRANSFER
Loss to the estate
Planning Point: Could there be an IHT impact?
What is the impact?
PENSION DEATH BENEFITS IHT
PENSION DEATH BENEFITS
SPOUSAL BYPASS TRUSTS
PENSION DEATH BENEFITS
Why might you use one?
SPOUSAL BYPASS TRUSTS
1
2
3
Control
Tax
Other reasons
PENSION DEATH BENEFITS SBT – TAXATION POST 75
Original Pension
Pay to trust – SLSDB charge of 45% deducted
Death of member
Trust pays to beneficiary with reclaimable tax credit
Pay to individual – marginal rate deducted
Beneficiary claims tax back from HMRC
?
Planning Point: Is a SBT appropriate?
PENSION DEATH BENEFITS SPOUSAL BYPASS TRUSTS
PENSION DEATH BENEFITS TRIGGER POINTS
Type of scheme
Life events
1
2
3 IHT
PENSION DEATH BENEFITS
By the end of this session you will be able to:
• Identify what death benefit choices are available
• Explain the taxation of death benefits
• Understand the impact of IHT on death benefits
• Describe spousal bypass trusts and how they work
LEARNING OUTCOMES
THANK YOU
The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales, company number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London’s customers to other insurance companies. The firm is on the Financial Services Register, registration number 302391. Registered in England and Wales company number 4414137. Registered office: 55 Gracechurch Street, London, EC3V 0RL. RL Corporate Pension Services Limited, registered in England and Wales, company number 05817049. Registered office is at 55 Gracechurch Street, London EC3V 0RL. December 2018| PR P PN 0035